Delinquency Management

Delinquency is the situation where loan repayments are overdue. Some of the definitions of loan
delinquency are mentioned below:
A delinquent loan (or loan is arrears) is a loan on which payments are past due.
Delinquent loans are referred to as arrears or late payments, measure the percentage of a loan
portfolio at risk.

Delinquent payments/payments in arrears are loan payments which are past due, delinquent loans
are loans on which any payments are due.

Delinquency can result in slower turnover of the loan portfolio and an inability to pay expenses
due to reduced cash flow. In loan principal is not recovered at the scheduled time, loans to other
borrowers can't be made, and payment of some expenses may also have to be delayed.

Borrowers may fail to repay their advances on schedule because of the followings reasons:
Causes of Delinquency
Causes beyond borrowers’ control
 Natural calamities
 Failure of the borrower’s health
 Death of the borrower(s)
 Incapacitation of the borrower(s)
 Escalating costs of the project inputs
 Refusal of marketing agents to market the end products
 Inadequate project appraisal by the lender prior to financing
Causes within the borrower’s control
 Mismanagement of the project
 Misapplication of the loan funds
 Borrower’s reluctance to make payments due to negative attitudes towards the loans
repayment
 Diversion of funds generated by the project.
 Noncompliance with the terms of the loan
 Non-cooperation with the bank officials
  Dishonest tendencies
Management of problem account
 Monitoring of loans
 The bank should accept the borrowers proposal on how to repay the loan
 Constant check ups
 Incentives / rewards
 The bank may advance additional funds to the borrower
 Sensitization of staff and clients
 Scheduling the loan by giving grace period to the borrower
Effects of delinquency
 Bankruptcy of the financial institutions
 Financial loss to the financial institutions
 Increase in the provision of bad debt
 Increased expenses
 Closure of the financial institutions
 Loss of credibility, borrowers won’t want to deal with such institutions
 Etc

Rescheduling and Refinancing

When a client is unable to repay a loan due to illness, disaster, mis-management, or some other
crisis, it may be appropriate to reschedule or refinance loan. Rescheduling a loan refers to
extending the loan term or changing the payment schedule or both. Refinancing a loan refers to
providing an amount of loan funds in addition to the original loan amount. This allows clients to
begin making the loan payments again and it is hopped, to continue payments until the loan is paid
in full.
Rescheduling or refinancing loans reduces the arrears in a portfolio by converting a delinquent
loan into one that appears to be a healthy loan. This happens even though the risk has not
necessarily been reduced. In fact, the risk may be higher due to the rescheduling or refinancing.
Essential Elements of Managing Delinquency
Delinquency management requires a comprehensive review of the lending methods, operational
procedures and institutional image of the bank. Delinquency is often a result of the poorly managed
loan products and delivery mechanisms. There are six essential elements to managing delinquency.
The credit service must be valued by clients: The main reason that clients repay a loan is that
they want to receive a subsequent and larger loan. This incentive is not effective unless the client
value the loan service. Therefore, the loan product should suit the client's needs, the delivery
process should be convenient, and the clients should be made to feel that the bank respects and
cares about them.

Clients must be screened carefully: The borrowers’ selection process should as much as possible
weed out unreliable borrowers or entrepreneurs whose activities will not enable them to repay a
loan. Once borrowers are selected, it is important that they receive loans structured in such a way
as to enable them to repay in accordance with their repayment capacity.

Field staff and clients must understand that late payments are not acceptable. Borrowers must
clearly understand that in accepting a loan they agree to a financial contract that must be respected
by repaying the loan according to the payment schedule. Some banks charge a late payment penalty
after a certain number of days have passed without payment. There is evidence to show that this
works well in discouraging late payments, but if the clients are substantially late with their
payments, an accumulating penalty could result in too great an additional cost and may cause them
to default on their loans altogether. Other banks, charge a higher rate of monthly interest and return
a portion of it if the client repays the entire loan on time. Clients are thus encouraged to repay their
loans as agreed and receive a lump sum payment at the end of the loan term to invest as they wish
Banks need accurate and timely management information systems: Staff must be able to
quickly identify borrowers who are delinquent through a MIS that accurately reports and monitors
loan repayments. The easier it is for field staff to figure out whose payments are due and when and
who is late and by how much the more time they spend with borrowers. Credit Officers should
review their portfolio daily to see which borrowers are behind in their payments.

Delinquency needs effective follow-up procedures: Once a delinquent borrower is identified,

MFI staff must immediately follow-up with the borrower to communicate the message that
delinquency is unacceptable. It is crucially important that other borrowers see and understand the
consequences of delinquency, so that they do not begin to miss payments (the domino effect).
Follow-up procedures may involve getting the group or village leaders to put pressure on the
borrowers, visiting the client, repossessing as asset, or publicly announcing that a borrower is
delinquent. Furthermore, MFIs should schedule weekly staff meetings to discuss problem loans
and decide on the correct action. Sometimes, depending on the context in which the MFI is
working, delinquent loans are passed on to a collection agent or police are brought in and criminal
charges are pressed.

The consequences of loan default must be sufficiently unappealing to clients: These

consequences could include no further access to loans (for borrowers or the entire group), a bad
credit rating, and collection of collateral, legal action, visit by debt collectors, penalties, and public
announcement.